Fair Value Calculator Tutorial

The Fair Value Calculator estimates what a stock is worth from three things: what it earns today, how fast those earnings grow, and what investors will pay for them later.

The method is simple enough to check by hand. Grow earnings per share for a number of years, multiply the final figure by a P/E ratio to get a future stock price, then discount that price back to today. The result is the most you can pay now and still earn the return you want.

Everything here is free, and you don't need an account. Treat the result as an estimate. It's only as good as the assumptions behind it, which is why the page spends so much room showing you how the answer moves when they change.

Start from a stock

Type a company name or ticker symbol into the search box at the top. Results appear as you type, and close counts: "netflix" and "NFLX" both get you there. The list only has stocks. ETFs and funds are left out, because they have no earnings per share to value.

Pick a stock and the calculator fills in its numbers for you. A line under the search box tells you what it used: the current price, the trailing earnings per share, analysts' expected EPS growth, and the P/E ratio. The word "expected" links to the stock's forecast page, so you can see where the growth figure comes from.

To switch stocks, clicktap the small x next to the ticker and search again. The stock also lives in the page address, so you can bookmark or share a link like the one below.

Set your assumptions

The Assumptions card holds every number the model uses. The fair value updates as you type. There's no Calculate button to press.

• Earnings per Share is the starting point: diluted EPS over the last 12 months.
• EPS Growth Rate is how fast earnings grow in the first year. When analysts publish a three-year EPS forecast, the calculator starts from that. Otherwise it falls back to the company's historical growth.
• Terminal EPS Growth Rate is the growth rate in the final year. Growth slows from the starting rate to this one in equal yearly steps. Fast growers rarely stay fast for a decade, and this keeps the projection from compounding a hot year forever.
• Years is how far out you project. It starts at 10.
• Exit P/E Ratio is the multiple you expect the stock to trade at in the final year. It starts from the stock's five-year average P/E, capped at 20.
• Required Annual Return is the yearly return you want. The future price is discounted back at this rate, so a higher number gives a lower fair value.

Hover overTap the small i next to any label to see what the field means and where its starting value came from. If a value was capped, the note says so and shows the original figure.

Your changes are kept in the page address as you make them. Bookmark the page or copy the link, and it opens with the same stock and the same numbers. Only the fields you changed are added, so the rest still follow the latest data.

Read the fair value

The large number is the fair value per share. The pill beside it compares that to the current price: green with "upside" when the fair value is higher, red with "downside" when it's lower.

On the right you'll find the Current Price and, when analysts cover the stock, the Analyst Target with its own pill. The target isn't part of the calculation. It's there so you can see how your number compares with Wall Street's.

The bar underneath puts it all on one scale. The green Buy Zone runs up to the fair value, the red Overvalued zone sits above it, and the marker shows where the price is today. When you change an assumption, the zones slide to their new positions.

Add a margin of safety

Your assumptions will be wrong somewhere. A margin of safety builds in room for that by cutting the fair value by a percentage you choose. It starts at 0%, which leaves the fair value untouched.

Set it to 20% and three things change. The headline becomes "Fair Value With 20% Margin of Safety" and shows the reduced figure. A Fair Value row appears on the right, so the original number stays in view. And an amber Margin of Safety zone opens up on the bar between the buy zone and the overvalued zone.

Keep in mind that the upside or downside pill now measures against the reduced figure. The sensitivity table further down follows along too.

The four key numbers

Four boxes at the top of the results show what the model projects for the final year:

• EPS in Year 10 is where earnings end up, with a pill showing total growth from today's EPS.
• Stock Price in Year 10 is that EPS multiplied by your exit P/E. Its pill shows the total change from today's price.
• Annual Return is what you'd earn each year by buying at today's price and selling at the projected one. Compare it with your required return: if it's lower, the stock is priced above your fair value.
• Current P/E Ratio is the stock's P/E today. Compare it with your exit P/E to see how much the multiple has to shrink or grow.

The year in the first two labels follows the Years field, so a 5-year projection reads "EPS in Year 5".

Follow the projection

The chart shows the path the model takes. The green bars are earnings per share each year, and the blue line is the projected stock price. The tag on the right edge marks the final price.

The line starts at today's price and ends at the final EPS times your exit P/E. In between, the P/E moves from today's multiple to your exit multiple in equal yearly steps. That's why a stock trading at 35 times earnings can show a price line that flattens or even dips, while its earnings keep climbing: the model assumes the multiple shrinks toward your exit P/E along the way.

Hover overTap any year to see its EPS and price, plus the EPS growth and P/E ratio the model used for that year. The question mark next to the chart title has a short reminder of how to read it.

Test your assumptions

The table below the chart answers "what if I'm wrong?" for the two inputs that matter most. Each row is a different EPS growth rate, each column a different exit P/E, and each cell is the fair value for that pair.

The outlined cell in the middle is your current assumption, so it always matches the headline. Green cells are above the current price and red cells below. If the whole table is one color, your conclusion holds up across a wide range. If it flips from red to green one step away, the answer depends heavily on that one guess.

Use your own numbers

You don't have to pick a stock. With the search box empty, the calculator shows a made-up company and adds a Current Stock Price field at the top of the Assumptions card. Fill in the price and the rest, and it works the same way.

This is handy for a stock we don't cover, for a private company, or for checking a number from an article against your own math.

A few finishing tips

• The method needs positive earnings. If a company is losing money, the calculator says so and shows no fair value.
• The exit P/E does most of the work. Moving it from 20 to 25 raises the fair value by a quarter, so be honest about what a mature version of the company would trade at.
• For companies valued more on cash flow than earnings, try the DCF Calculator. The note under the calculator links to it and carries your stock across.